Lend Lease’s Barangaroo leasing deal points to growth

Lend Lease
’s deals with
Westpac
and KPMG, to lease space in the $2 billion Barangaroo towers in Sydney, have won over most analysts.

The deals, announced on Friday, increase the likelihood of some early profit from the project and the possibility of earning development and construction fees on $1.6 billion worth of building work.

However all the analysts still want to see the yet to be finalised capital structures for the towers.

The Westpac lease, for one of the towers, is unconditional. Lend Lease will have to build it. But the KPMG and Lend Lease deals for the second tower are conditional on funding.

Lend Lease stock rose 12¢ yesterday to $7.28.

Morgan Stanley analyst John Meredith wrote that the $6 billion Barangaroo project was the first step in the company’s earnings growth story for the next decade.

“With further catalysts ahead, we believe this project will help support Lend Lease’s 7.6 per cent earnings per share compound annual growth rate in 2011-16," he wrote, maintaining his overweight rating on the stock.

Goldman Sachs said the unconditional deal with Westpac would trigger the commencement of the project, eventually adding $1.6 billion to Lend Lease’s construction workbook.

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However Goldman Sachs stressed that until the equity partner was locked in, Lend Lease could not take a profit or any development or construction earnings on the project.

“The announcement highlights that the Barangaroo project is an important internal project driver for Lend Lease development and construction activity in a period when external opportunities are relatively quiet," wrote Goldman Sachs, which has a buy rating on the stock.

JP Morgan said the tenancies were a key milestone for Barangaroo.

“This should provide sufficient confidence in the project to attract capital partners which would, in turn, be an important profit and de-risking event," wrote JP Morgan, which has an overweight rating on the stock.

UBS also has it as a buy, in the expectation of 12 per cent growth in net profit in 2013, on the back of $63 million in profit from Barangaroo and $40 million profit from the exit of the Greenwich venture in London.

Deutsche Bank also has a buy rating, helped by the increasing visibility of earnings growth in 2013 and 2014 and an under-valued stock.

However, Merrill Lynch still maintains an under-perform rating.

Merrill Lynch wrote that an unconditional sale to a capital partners this week, could add $40 million to profit this financial year.

But without a deal, Merrill Lynch assumed that the first profit recognition would not be until 2015.